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Double hit for risky borrowers

Finance Markets / Latest Activity

Australia

Apr 15 2018

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Highly geared borrowers are charged higher interest rates, as well as mortgage insurance, the Commonwealth Bank has confirmed. 

The Productivity Commission’s draft report on competition in the financial system, released in February, found ­that while around 25 per cent of all owner-occupiers were sold LMIs, only about 1200 claims were made by the banks last year.

The draft report has prompted a major increase in scrutiny on LMI, with the commission recommending that unused insurance be ­refundable when borrowers refinance or pay out their loan, an action that is currently rarely carried out.  

Productivity Commission chairman Peter Harris has indicated that his final report will target LMI, specifically pricing and market ­competition, with consumers currently charged between $6000 and $20,000 for the product.

Consumer group Choice says the product should be banned, and replaced with a higher interest rate for high risk borrowers. 

But the Commonwealth Bank rejects the suggestion that borrowers with LMI were being hit twice due to high interest rates.

“LMI does not fully compensate for the additional risk associated with providing loans to higher loan-to-value-ratio customers, hence the residual ­additional risk is compensated for through higher interest rates,” CBA told The Australian.

 

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